Retirement Plan Peril

My friends in the benefits department at a local university told me about an alarming trend. After making great strides enrolling more retirement plan participants over the past few years, they have noticed that the number of loans against the plan has spiked and that participation rates this year have begun to dip. I explained that participants are operating under a double-whammy of pinched pocketbooks and scary markets. The combination can prompt some to make decisions about their retirement accounts that they may regret in the future.

As the pressures of the credit crisis and escalating prices hit household bottom lines, something has to give. For some, that has meant tapping money that has been deposited into retirement accounts. According to data from the Transamerica Center for Retirement Studies, a nonprofit corporation funded by Aegon NV's Transamerica Life Insurance, the number of loans outstanding from their retirement plans jumped to 18% at the end of last year from 11% in 2006. Other retirement plan sponsors report similar numbers.

This is the part of the article when I should scold folks for draining retirement accounts and warn that they will significantly impact their future by doing so. But for many, I understand that there are not a lot of good alternatives. Too many people counted on equity in their homes to finance lifestyles that their incomes could not justify. This is what your mother meant when she told you that reckless actions would come back to haunt you and a certain piper would need to be paid. The data indicates that the piper should feel flush right about now.

I am actually more concerned about the people who have pulled back on retirement plan contributions not due to cash flow, but because they were spooked by falling markets. Remember that if you are a long term investor, you want the market to fall sometimes—that way, you can buy stuff cheaper! One of the benefits of participating in a payroll deduction retirement plan is that it forces you be disciplined—to invest each pay period, regardless of what is going on in the markets. If you don’t upend this strategy, it will work over time. However, if you mess with it, chances are that you will stop contributing when you could be snapping up bargains and only increase your contributions after the market has already risen. By sticking to your overall retirement and investment plan, you will likely avoid retirement plan peril.